Australian Banking Regulator Maintains Interest Rate Buffer Rule Amid Rising Mortgage Stress

A man walks past a bank advertising home loans in Melbourne, Australia, on Feb. 7, 2023. William West/AFP via Getty Images

Australia’s banking regulator has stated that it will not ease the interest rate buffer requirements for borrowers despite more homeowners being subject to mortgage stress.

This comes as a significant number of borrowers will see their cheap fixed-rate home loans, which were acquired before the central bank started the interest rate hiking cycle in May 2022, expire by the end of this year.

According to the Reserve Bank of Australia (RBA), one-quarter of fixed-rate loans outstanding in early 2022 has already expired, while another 40 percent will lapse by the end of 2023 and the remaining 20 percent by the end of 2024.

The RBA expected most of the fixed-rate loans to roll on to much higher variable interest rates that carried the full weight of its cash rate hikes.

In such a situation, many borrowers have resorted to refinancing to cope with the surge in interest rates.

During a recent Senate committee hearing, Australian Prudential Regulation Authority (APRA) chair John Lonsdale said Australian mortgage refinancing had reached the highest level in 20 years.

He also noted that there was plenty of competition in the lending market with the absence of regulatory impediments to borrowing.

However, refinancing is not always an option for homeowners, as the RBA pointed out in the latest Financial Stability Review that around 16 percent of borrowers could not refinance their loans because they failed to meet the serviceability assessments rule.

While the head of the banking regulator acknowledged that some mortgagors might have difficulty refinancing their loans, he stated that the APRA would keep the buffer required for qualifying for a mortgage intact.

“For some, the impact of rising interest rates may have resulted in less favourable serviceability results. Others might be impacted by declining housing prices or changed personal finances,” he said.

Lonsdale added that banks still lent out to homeowners when they identified them as good borrowers.

Currently, the interest rate buffer rule dictates that home buyers taking out a loan must be able to meet repayments at an interest rate at least three percent higher than the rates specified in the loan products.

Financial Broker Community Calls for A Drop in the Buffer

Lonsdale’s remarks come as the financial broker community has been calling for a reduction in the interest rate buffer to protect vulnerable borrowers.

The Finance Brokers Association of Australia (FBAA) suggested the APRA lower the buffer to 1.5-2 percent, saying it would be more appropriate to do so under the current economic environment.

A man walks past a bank advertising home loans in Melbourne, Australia, on Feb. 7, 2023. William West/AFP via Getty Images

“It is vital that new borrowers see this difference–which can be around 0.5 percent–so they are financing or refinancing with full awareness,” FBAA managing director Peter White said.

Meanwhile, Matthew Posselt, the owner of the broker firm Elite Finance Australia, said the APRA should adopt a common sense approach concerning refinancing.

“If the refinance is going to put the customer into a better position with lower repayments, and they have a proven track record of making their repayments on time, then it may be appropriate to reduce or waive the buffer,” Posselt said.

“However, the framework for this approach would need careful consideration to ensure that it is fair and equitable for all.”

APRA Says Australia Is Not Exposed to Banking Collapses

Meanwhile, the APRA head told the Senate committee that Australian banks were unlikely to suffer from banking collapses as witnessed in the United States and European Union.

“The Australian financial system remains very strong, very stable, very resilient,” Lonsdale said.

However, he noted that the recent events had highlighted “new complexities and challenges” in the banking environment.

“There are linkages, and there are lessons ... we are in the risk business,” Lonsdale said.

While acknowledging that the stability of the system depended on the people running the banks, Lonsdale said he had met with the boards of three major Australian banks in recent weeks and reminded them of the banking collapses in March.

“I can tell you all of them are very alive to that,” he said, noting that both the APRA and the banks paid close attention to international situations.